TCS Daily

Second Leg of the Ownership Society in Jeopardy?

President Bush's plan to fix Social Security with personal stock and bond accounts will help create an Ownership Society that encourages self-reliance, choice and responsibility. Coincidentally, expanded stock ownership creates more Republican voters.

It's no secret, however, that the plan is in trouble. Social Security is 70 years old, and inertia is powerful. So is the demagoguery of groups like the AARP.

But an Ownership Society ("OS" for short) is not built on stocks alone.

In his Dec. 16, 2003, speech outlining the OS, President Bush said, "We want more people owning their own home. It is in our national interest." Nearly three-quarters of America's white families are homeowners, compared to just half of black and Hispanic families. Bush has set a goal of increasing homeownership among minorities by 5.5 million families by 2010 -- a good idea, socially, economically, politically.

Unfortunately, however, this second leg of the OS could be in as much jeopardy as Social Security, but for different reasons. Architects in Congress want to rebuild America's highly successful home-buying system by putting regulatory curbs on the firms that provide much of the money that banks and other mortgage originators lend to families.

The targets, Fannie Mae and Freddie Mac, are known as government-sponsored enterprises, or GSEs -- private businesses whose shares trade on the New York Stock Exchange. They have charters which, in the words of a recent study by Fed economists, allow them to benefit "because purchasers of their debt assume that the government will not allow the GSEs to fail, even though the government has made no explicit promise."

Typically, when a bank makes you a home loan (mortgage), it sells that mortgage to Fannie or Freddie, which, in turn, puts it into a package of similar loans and sells them, in pieces, to investors.

This system has worked well, creating a robust, liquid market that lets families take out a 30-year mortgage at about a point above Treasury interest, with a low down payment and an option to refinance if rates drop. Partly as a result, "Americans," writes academic expert Peter Salins, "are the best-housed people in the world."

Studies show homeownership boosts civic participation and educational success and reduces behavioral problems for kids. Ownership, of any sort, makes people more conservative, both personally and politically.

Joel Kotkin and Susanne Trimbath show in an article in The American Enterprise magazine that home ownership correlates to support states gave to Bush in 2004. In California, only 59 percent of families own their homes, but in red states like Virginia and Ohio, the figure exceeds 70 percent.

Why would a Republican administration, whose domestic policy is based on the powerful OS idea, want to tamper with this success?

Lately, the GSEs, politically weakened in a series of irregular-accounting disclosures, have come under attack from competitors and their supporters, who want to limit the growth of Fannie and Freddie and give the GSEs' regulator much more power. The ultimate focus is that implicit guarantee of the GSEs' bonds, which critics see as unfair government intervention.

Of course, the GSEs' mega-bank competitors enjoy an implicit guarantee of their own. It's called "too big to fail." Raise your hand if you think that the government will allow Citigroup, with $1.5 trillion in liabilities, to go under.

All nations intervene in the operations of their financial institutions, with both constraints and incentives. The question of how much of each is tricky, but, as a guiding principle, we should be reluctant to change a system that's working. Follow the Hippocratic Oath: first, do no harm.

Some opponents of Fannie and Freddie -- including at the Fed -- believe that the U.S. has "over-invested" in real estate and worry about GSE risk. They take what they see as a principled position on the GSEs: change their charters so they operate like conventional banks.

But there's a cost: fewer owners. John Hood, free-market author of the excellent book "Investor Politics," writes, "The growth of homeownership was the result of both market forces and government intervention, [and] there were important political consequences." Homeowners, for example, led the 1978 tax revolt in California that started the Reagan revolution.

My own view is that, while more regulatory scrutiny of the already-chastened GSEs is probably needed, alterations that would change the system are not. Don't toss these productive babies -- and chances for a true OS -- out with the bathwater.